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Kansky v. Commissioner (T.C. Memo. 2020-43)

On April 13, 2020, the Tax Court issued a Memorandum Opinion in the case of Kansky v. Commissioner (T.C. Memo. 2020-43). The issue properly before the court in Kansky was whether the Whistleblower Office of the IRS abused its discretion in rejecting the petitioner’s claim on the basis that it was speculative and did not provide specific or credible information regarding a violation of the Federal tax laws.

Background to the Claim

In May 2018, the petitioner filed a Form 211 (Application for Award for Original Information) with the Whistleblower Office of the IRS (WBO) identifying two target taxpayers: (1) a corporation that connects workers with medical offices to provide temporary services and (2) the president of that corporation. Petitioner asserted that the target taxpayers had misclassified their employees as independent contractors and had erroneously sent them Forms 1099-MISC, Miscellaneous Income. Petitioner indicated that he had received some of his information from his girlfriend, whose company was in direct competition with (and generally was antagonistic to) the target company.

To “support” his claims petitioner provided: (1) a letter setting forth his allegations, (2) a description of the target corporation, which appears to have been copied and pasted from an online article, and (3) the company’s “terms of service” from the target’s website, which terms stated that the company connected medical professionals with medical offices needing assistance. Petitioner neither indicates how these documents establish that the company misclassified employees, nor does he identify a specific year for which any alleged tax violation occurred. Furthermore, the terms of service included by the petitioner clearly state that the staffing agency brokers relationships, but does not, itself, employ the workers.

Investigation

The WBO performed a cursory initial review of the claims, and, finding that they might have merit, referred them to Exam. Exam investigated the claims, ultimately concluding that the target company had no medical employees which it could or did misclassify. Exam finished its review and forwarded its recommendation to the WBO that the claims were lacking any merit or supporting documentation, were lacking in credibility, and would not lead to the assessment or collection of any penalties (a prerequisite for a whistleblower award).

The WBO took Exam’s condemnation of the petitioner’s claim under advisement and, through a final determination letter sent to the petitioner, rejected the claims. The petitioner timely filed a petition in which it asked the Tax Court to review the WBO’s rejection for abuse of discretion, and unamused, the IRS moved to dismiss, to which motion the petitioner objected.

Standard and Scope of Review

The WBOs determination to reject a whistleblower’s claim is reviewed by the Tax Court under IRC § 7623(b)(1) and under an abuse-of-discretion standard. Kasper v. Commissioner, 150 T.C. 8, 22 (2018). An official act is an abuse of discretion if it is determined to be arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

In the recent Tax Court opinion in Lacey v. Commissioner, 153 T.C. No. 8, *33-*34 (Nov. 25, 2019), the Tax Court confirmed that it had jurisdiction to review, for abuse of discretion, a determination by the WBO to reject a whistleblower claim for failure to meet certain basic criteria like “credibility” and “usefulness” and “speculation.”

Similarly, the regulations underlying the WBO’s authority establish that any claims may be rejected if it supplies only mere speculative information or fails to provide specific and credible information regarding tax underpayments or violations of internal revenue laws. See Treas. Reg. § 301.7623-1(c). Upon rejecting the claim, the WBO must provide written notice to the claimant that states the basis for the rejection. Treas. Reg. § 301.7623-3(b)(3). The Tax Court’s review is confined to the administrative record. Kasper, 150 T.C. at 20.

The Mechanics of IRC § 7623(b)(1)

Nondiscretionary (i.e., mandatory) awards (between 15% and 30% of the collected proceeds) are available to claimants if the claim satisfies basic (but important) statutory requirements. IRC § 7623(b)(1). The IRS must first conduct an administrative or judicial action, which is a prerequisite to the collection of proceeds from the target taxpayer, which, in turn, is a prerequisite for awarding the claimant anything under the whistleblower statute. IRC § 7623(b)(1); see also Cohen v. Commissioner, 139 T.C. 299, 302 (2012), aff’d, 550 F. App’x 10 (D.C. Cir. 2014); Whistleblower 14106-10W v. Commissioner, 137 T.C. 183, 189 (2011).

Although the Tax Court has jurisdiction to review the IRS’ award determination, IRC § 7623 does not vest the Tax Court with the authority to look behind the reason a claim was rejected by the WBO, nor does it permit the Tax Court to direct the IRS to commence an administrative or judicial action or to even suggest how the IRS should go about such action. Cooper v. Commissioner, 136 T.C. 597, 600-601 (2011). If the IRS proceeds with no administrative or judicial action, there can be no whistleblower award. Id. at 601.

Original opinion: (T.C. Memo. 2020-43) Kansky v. Commissioner

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